Trend Watch

For those who are first time reading Trend Watch, please click
here to understand the term definition and/or how to interpret it.

Part I - Market Comments

First of all, we made a change in the Signal Update section. In the Hypothetical
Return column of WATTS Intermediate-term Signal Status, we've changed it from
reporting the hypothetical return figure to "See Model Portfolio".

The reason is quite obvious. In the Model Portfolio, we've suggested 25% long position
since 10/31/05. Since the intermediate-term signals still remain SELL, reporting
the hypothetical return on the SELL signal is meaningless. Worse, it raise
a lots of questions and confusion in our subscribers. We've explained to subscribers
that we don't initiate any trend investment based on the intermediate-term
signal. The intermediate-term signal is for the backdrop of our system view
and the fine-tune of our model portfolio.

It's often that we could see a long position suggestion based on a new short-term
BUY signal in a weak intermediate-term SELL signal. Besides, we don't and never
suggest any short position for the intermediate-term investors. We always suggest
cash and cash-like position for an intermediate-term SELL signal. Thus, nobody
suffers the hypothetical loss as we reported it. It's misled and confusing.
We figured out that removing the wrongful return reporting may be the solution
to it.

OK, let's go back to the market. The market continued to climb up as one should've
expected this week. That is the third week after WATTS issued its short-term
BUY signals. For aggressive investors, a significant 5% return is in store
in just 3 weeks. That's really good. WATTS is doing its job and doing it quite
well. We have no complaints at all. Other than holding your position tight,
we can say nothing.

Just only one thing raises some concerns in our mind -- WATTS hasn't issued
its intermediate-term BUY signals yet. In terms of price action, the current
upward market trend is no doubt, very strong. Following this kind of strong
price action, we expect that WATTS should follow its short-term BUY and issue
the intermediate-term BUY in 2 to 3 weeks. It hasn't happen yet.

We described this issue in the last 2 signal reading updates that the WATTS
signal reading was reluctant to go up with the market. The design of the WATTS
system makes WATTS not only able to detect the market trend reversal and indicate
the future moving direction, but also able to detect the strength of an on-going
market trend. Currently, from the market price action that we can see, it's
a strong trend. But from the perspective of WATTS, it's weak. What gives?

To solve the mystery, we went back to the history of the WATTS signal reading
for pattern searching and found out that such a reluctant behavior often results
in an unhealthy trend. Here we call it "unhealthy" because there is no better
word to describe it. Such a trend is not necessarily a very short-lived trend
but usually, it does not last for a very long time. Such a trend is not necessarily
weak in terms of price action. Sometimes, it could be very powerful just like
the current one. We can't call it weak. We can't call it short-lived. It is,
however, not as healthy as a strong, long-lived major trend in terms of the
WATTS signal reading pattern.

More often, such an unhealthy trend is the result of a counter-trend market
movement meaning that such a trend is hardly a trend. More precisely, it's
merely a correction for a higher-level trend.

From the WATTS's perspective, the current major trend is still down represented
by its intermediate-term SELL signal since mid August 2005. Since then, we
have a counter-trend correction in early September 2005. While we still used
the term "short-term trend" to call the September's correction in the newsletter,
it's actually just a correction to the major downtrend.

However, It's kind of ridiculous for us to call the current upward trend a
upward correction in the major downtrend. The closing price last Friday has
already surpassed the peak in August 2005. By the definition of the traditional
technical analysis, the major trend has already turned up. Not so soon for
WATTS. The price action can deceive. The inner structure of a trend monitored
by WATTS would be more trustworthy at the time.

Please be aware of the following statement. We are not predicting anything.
Don't take our analysis of the WATTS signal reading pattern as a bearish hint
and act upon it. We follow the WATTS signals not our analysis. Trying to outguess
the WATTS signals will always carry a risk of losing your position and having
to acquire it back at a worse price later on. By performing the above analysis,
we just want to satisfy our curiosity and share it with you.

True, for aggressive and savvy investors, they can try to squeeze more profits
out of the WATTS signals by incorporating the above analysis into their strategy.
But we don't encourage it. Some subscribers may even want more signal reading
updates to satisfy the above purpose, but we really don't want you to do it.
Simply following the signals, you can earn a good return on investment and
also enjoy your life.

The reason we are so cautious is that the market can do anything it wants
to. A reluctant signal reading pattern can't guarantee anything.

In the long run, the signal reading pattern analysis could be something but
we don't have enough data to conclude anything yet. We'll continue to report
the signal reading pattern analysis if the similar situation occurs.

Turning to the market side. There are 3 higher highs ranging from 2150 to
2250 for Nasdaq Composite since 2004. The current one is the fourth and also
slightly higher than its 3 priors. It would be interesting to see if this breakout
can materialize and evolve into a long lasting uptrend. Or the history will
repeat and a serious decline will follow after a fake breakout. The current
short-term signal from WATTS is BUY. We are joyfully riding on the right side
of the market. Maybe we should just relax and let WATTS tell us what to do
next.

Part II - Signal Update

WATTS Short-term Signal Status

Index

Signal Type

Issued Date

Closing Price
When Issued

Closing Price
Last Friday

Hypothetical
Return*

NASDAQ

BUY

10/31/2005

2120.30

2227.07

+5.04%

S&P 500

BUY

10/31/2005

1207.01

1248.27

+3.42%

Last Closed Short-term Signal

Index

Signal Type

Issued Date

Closing Price
When Issued

Closing Price
When Liquidate (10/31/05)

Hypothetical
Return*

NASDAQ

SELL

9/19/2005

2145.26

2120.30

+1.18%

S&P 500

SELL

9/19/2005

1231.02

1207.01

+1.99%

WATTS Intermediate-term Signal Status

Index

Signal Type

Issued Date

Closing Price
When Issued

Closing Price
Last Friday

Hypothetical
Return*

NASDAQ

SELL

8/18/2005

2136.08

2227.07

See Model Portfolio

S&P 500

SELL

8/18/2005

1219.02

1248.27

See Model Portfolio

Last Closed Intermediate-term Signal

Index

Signal Type

Issued Date

Closing Price
When Issued

Closing Price
When Liquidate (8/18/05)

Hypothetical
Return*

NASDAQ

BUY

5/27/2005

2075.73

2133.08

+2.76%

S&P 500

BUY

5/27/2005

1198.78

1219.02

+1.69%

WATTS Bottoming Zone Alert

Index

Current Signal

Issued Date

Last Signal

Issued Date

NASDAQ

None

None

Level-I Alert

4/15/2005

Part III - Model Portfolio Update

Model Portfolio provides investor who doesn't know how to react to the WATTS's
signal a simple guideline of how to manage his/her portfolio. If you are interested
in following this guideline table, please Read
This Important Note first.

Honestly, we are not a fan of the famous Rich Dad, Poor Dad's author, Robert
Kiyosaki, mainly because there are too many problems in his theory of getting
rich quick and easy. But we do want you to read this article and think about
your retirement or at least long-term investment plan.

Some of our subscribers are using WATTS to manage their retirement accounts.
We encourage you to think about the possibility of applying the same strategy
to your retirement account management. For those of subscribers who are doing
so, they are not pursuing a killing return with WATTS. What they ask for is
just a few % higher than the average market return every year, reliably
and consistently.

You can do the math yourself to figure out how much more money you would have
when you retire if you can just earn 3% higher than the long-term average market
return. Compounding will do the magic for your retirement. If you don't believe,
see the following example.

Assume the average market return is 8% after all costs and you, by using WATTS
to manage your retirement account can earn 11% on your investment. What's the
difference after 30 years? You may think that 3% is no big deal.

Well, after 30 years, 8% return will make your initial $10,000 investment
become $100,626. Not bad. Let's see what happen to your initial $10,000 if
you can earn 11% on it. It's $228,922. No, it's not typo. For every $10,000
investment, you can earn $128,296 more for your retirement even if you only
add 3% extra return on it.

We know this sounds like a sales pitch, but we still want to say it. Knowing
and subscribing to Trend Watch could be your best investment decision in your
whole life.